Here's what could happen to HK markets if the 2007 bubble repeats itself

Will A shares be shattered again?

It has been noted that there are a lot of worries in the market as to what happens to the China and HK markets (A share in particular) in the event of a repeat of the 2007 bubble and whether it will end in tears again.

According to a research note from Credit Suisse, comparing the markets of HK, Shanghai and Shenzhen (including the Shenzhen SME and ChiNext board) today vs end-2007, the report draws some observations.

The good news is that P/Es of both China and HK (particularly the big cap stocks) are still much cheaper now versus those in 2007.

The bad news is that P/Es of small caps in China, represented by the Shenzhen SME and ChiNext market, are at bubble valuations. At some point, there will be a massive correction of these stocks, in the report's view.

Here's more from Credit Suisse:

Development of both the mainland and HK stock markets has been very rapid after the last bubble burst, with both the number of listed companies and total market cap rising significantly.

Development of Shenzhen has been much faster than that of HK and Shanghai, due to the rapid growth of the Shenzhen SME and the ChiNext board.

Trading is much more active in this cycle than in 2006-07. The turnover-to-market cap ratio has risen to an unprecedented level in the A share market, at over 600% in April, much higher than all major markets over the past 20-30 years, even during big bull markets.

This kind of ultra-active trading activity is definitely a very worrying factor.